The impact that technology has made on our lives is truly profound. Many of us now walk around with at least one, perhaps even more, supercomputers in our pockets that enable us to access a universe of information that 20 years ago we could only have imagined. This has enabled us to perform many tasks, in near real time, making instant gratification the norm, not a privilege. Yet, despite this, there are some areas which have struggled to keep up, and as superior technology becomes more widely available and we are able to do more instantly and easily, the limitations of these become ever more apparent.
In the financial space, the most obvious example is payments. In most countries the domestic payments infrastructure is well-established, reliable and entrenched in the domestic financial system. Yet despite this, they are now beginning to show their age, as consumers and business demand access to faster, more agile systems. The financial institutions who offer these are held hostage to the functionality of the payments infrastructure and their own legacy systems, which prevent them innovating and offering services to meet evolving customer demands.
There are steps being taken to change this, however, and a number of forward-thinking countries have renewed their payments infrastructure and built best-in-class real-time systems which not only facilitate faster payments but also a broader revolution in payments for both corporates and consumers.
A diverse landscape
Today, Asia Pacific (APAC) is a region at the forefront of payments innovation. India, Japan, Singapore, South Korea and Japan all have a form of real-time payments infrastructure – Japan’s Zengin system was actually the world’s first, although compared to modern standards it lags behind. There are also projects in development or being planned in Australia, Hong Kong and New Zealand.
But, for the most part, these examples are in developed Asia and as we covered in our last edition, the payments landscape in emerging Asia is very different. In these countries, which remain heavily reliant on cash, the financial infrastructure is dominated by traditional real-time gross settlement (RTGS) systems and ACH – there is limited domestic real-time infrastructure.
Nevertheless, market realities, primarily the wide usage of mobile devices in these countries, has caused a number of parties, including the regulators, to bolster their payments infrastructure. The aim is to develop systems that match the increasingly digital nature of these economies and to drive further financial inclusion by making them more accessible. In Thailand for instance, there is a progressive agenda and a deep desire to move away from a cash-based society. To do this the regulators understand that they have to broaden access to electronic payments and remove the friction around these. As a result, they are closely watching a number of projects across the region to see how best to modernise their system. This is also the case in Indonesia, Malaysia and Vietnam.
Setting the standard
What comprises a modern real-time payments system and how do they differ from legacy systems? The clue is in the name. Real-time systems are designed to provide (nearly) instant value transfer, primarily aimed at low value, high-volume retail payments. Their most important function is therefore speed, and most real-time payments systems have been designed to ensure that payments are completed within 15 seconds and without the fear of returns or charge backs. This is achieved because payments are not batched together and settled at various points throughout the day – as is the case with ACH systems. Of equal importance is availability. Modern payments systems need to reflect a society which is always plugged in and be available 24/7, 365 days a year, offering society unlimited flexibility. This is unlike legacy ACH and RTGS systems which typically close overnight and at weekends.
There are obvious benefits for corporates here should they wish to use these financial rails. “If payments can be made instantly, no matter the size, this provides a fantastic opportunity to better plan their payments,” says George Evers, Head of International Product Development, Immediate Payments at VocaLink. “This in turn will allow them to drive better liquidity management and reduce float.” The constant availability of the systems also means there can be less friction caused by time zones when making cross-border payments.
Aside from their speed and availability, real-time payments systems also offer added benefits around data. Legacy payments systems, while stable, are often constrained by the limited amount of data that can be passed around the network. New systems have looked to solve this problem by leveraging SWIFT’s ISO 20022 messaging standard, which allows for a much richer data set to be included in the payment file. ISO 20022 is based on 16 bit double bytes, which allows 65,536 characters, both roman and non-roman, to be included making it particularly useful in Asia where non-roman characters are widely used.
For a corporate, there are obvious advantages that come with more information being included in the payment files. As Carlos Palmers, Head of RT Market Infrastructures at SWIFT explains: “Reconciliation is a major challenge for corporates and a large part of this challenge comes from receiving payments which contain little to no information about what they are for. The ISO standard however, allows corporates now to include this data by including the invoice data in the payment file. We are seeing corporates leverage this opportunity by linking their payments application with their logistic chain, driving straight through reconciliation through their payments processes.”
An additional benefit of using ISO 20022 is that it uses extensible markup language (XML), an open standard in which rules are defined that allow for messages and documents to be encoded in a consistent manner. In theory, this should bring consistency to payment infrastructures around the world. Yet, it seems that currently this benefit is not being realised as countries and banks are offering slightly different versions of the ‘standard’.
There is lots of work being done, however, by numerous working groups who are looking to ensure a consistent standard is used globally. But, with numerous countries developing, or planning new systems, time may be running out. According to Gene Neyer, Global Product Manager at Fundtech the corporate community is acutely aware of this challenge and, in many cases, has lost patience. “Corporates I speak to tell me that they don’t care what standard is picked, just as long as it’s consistent globally, giving them the ability to streamline and simplify their payments processes.”
The market leader
A country which is setting the standard in regard to faster payments is Singapore, which in March 2014 launched its Fast and Secure Transfers (FAST) platform. FAST replaces the legacy eGiro payment system that dates back to the 1980s, and enables customers of (currently) 14 participating banks to offer real-time credit transfers and direct debit facilities. “This is the most modern and advanced payments infrastructure in the world today,” says VocaLink’s Evers, “and can provide a blueprint for systems globally.”
The initial phase of the scheme – real-time payments – came into effect on 17th March last year. Phase two, which involves bulk payments (G3 Bulk), is scheduled for Q4. The final piece of the jigsaw, an electronic direct debit authorisation (EDDA) system was expected to be rolled out in late 2015.
The direct debit authorisations will be set up and exchanged electronically, leveraging the scheme infrastructure and capabilities to support the adoption of a bulk payment and will benefit real-time debit transactions. It will reduce the turnaround time required to set up an authorisation from the existing 12 to 15 working days to five working days or less, depending on the readiness of billing organisations’ banks and the billing organisations themselves. Amendments and termination features will be included as part of the module.
Despite phase one only recently being completed, the market in Singapore is already beginning to realise the benefits. As Evers explains: “Since the launch, the participating banks have been competing and innovating in order to deliver best-in-class solutions to their customers. This has happened because the Monetary Authority of Singapore (MAS) demanded that all banks be ready on day one to ensure that the entire market could benefit and not just the customers of one or two banks.”
It must be noted, that for the most part, FAST has initially been aimed at the retail market. A maximum value transfer limit of SGD 10,000 was put in place during the formative months of the project to help it bed in. Naturally, this limited its use for corporates, but in recent months an increasing demand from the corporate community has seen the MAS raise payment limit from SGD 10,000 to SGD 50,000 providing more of an opportunity for corporates to use the service. According to Evers the challenge now will be how quickly the banks can innovate to offer the opportunity to utilise FAST to treasurers.
The up and comer
Work is also currently underway in Australia to build the New Payments Platform (NPP) which is set to modernise the country’s payments system, which to date has been based on bilateral clearing arrangements. The system will offer all of the benefits that we have come to expect from a modern infrastructure providing businesses and consumers with a fast, versatile, data-rich payments system for making everyday transactions. In contrast to Singapore however, there will be no upper limit for payment amounts, giving corporates the opportunity to access the system from day one to make immediate high-value payments. This, of course, depends on the banks’ ability to make this available to their corporate customers.
For SWIFT’s Palmers the approach Australia is taking is very innovative. “It is being built in such a way that allows for innovation to easily occur from banks and other third-party financial service providers. For instance, we have already seen examples of how it can be easily implemented into e-commerce platforms, facilitate mobile-to-mobile payments and also how notary services can be included in the payment files making it easier and quicker to process real estate transactions.”
SWIFT are building the underlying platform in Australia and a total of 17 institutions are taking part in the programme, including Australia’s ‘big four’ banks: ANZ, Commonwealth Bank, National Australia Bank and Westpac. Foreign institutions such as Citi, Bank of America Merrill Lynch, ING and HSBC are also heavily involved. It is expected that the NPP will go live in 2017.
A regional approach
The NPP, just like FAST in Singapore, is a domestic project, built to process domestic transactions in local currency. Yet, given the global nature of business and the increasingly global nature of e and m-commerce, could a regional infrastructure drive greater benefit?
According to David Brown, Senior Vice President, Payments and Products and Australia Country Manager at Fundtech there is a benefit and some countries have outlined a clear agenda to offer regional capabilities. “Singapore for instance indicated from day one that they wanted to eventually allow foreign currency transactions to occur within Singapore in real-time. They also indicated that once the infrastructure is stable and fully embedded domestically they wish to use it to facilitate cross-border payments across the ASEAN region and to connect the various clearing houses. These developments are definitely on the horizon although there are still challenges that need to be worked through such as the currency conversion, and how transactions will take place.”
SWIFT’s Palmers paints a similar picture for Australia’s NPP. “The platform is domestic in nature and all the participating banks were asked to have their infrastructure in Australia. But, a number of banks, particularly those with a strong regional presence, are already considering payments instructions from overseas in AUD and then inputting these into the NPP as a way to speed up the process of cross-border AUD payments.”
The technology is therefore in place to facilitate these cross-border flows but there is a regulatory hurdle. “The national payments infrastructure is a vital cog in any country’s domestic economy and overall community,” says VocaLink’s Evers. “Consequently, for countries to give away some degree of control of these to their regional neighbours may be a hard sell.”
A solution may potentially come from a system that is independent of governments and one that transcends borders – the blockchain. There has been a lot of development in this space in recent months, including a number of high-profile banks experimenting with the technology, and recently signing up to the R3 consortium. But, its real potential may be in being the glue that connects all domestic payments infrastructure together. This is one of the ambitions of Ripple, a company advertised as the world’s first open-standard, Internet Protocol (IP)-based technology for banks to clear and settle transactions in real time via a distributed network. It is Ripple’s view that their technology can not only connect these systems together but also allow for cross-border transactions to happen in real-time and at a reduced cost compared to today.
Fundtech’s Neyer, however, suggests caution around these solutions. “While these may have shown some success, the sample size is a tiny fraction of all cross-border payments. Whether these systems have the ability to scale up to that size and handle millions, if not billions of transactions is a big question.” According to Neyer, blockchain platforms are also currently limited in their use for corporates. “The data that can be included along with the payment is currently extremely limited (similar to legacy domestic systems). This will of course create the same issues many corporates are experiencing now regarding reconciliation. It will also limit their compatibility with modern domestic payments infrastructure that can accept lots of data.” Ripple have confirmed however that they are working to ensure that more data can be included in the payment file in the future potentially alleviating this issue.
Yet, despite these current limitations, Neyer sees these platforms having a broader impact. “Currently the banking industry hasn’t seen these platforms as a threat and instead has partnered with them to see how they can leverage the benefits they offer. It will be interesting to see if one of these Fintech companies makes a significant breakthrough and the dynamic shifts, making them a threat to banks, their business models and profitability.”
If this happens Neyer believes that banks would make significant changes to their business model, including lowering their costs and speeding up their processes. “One of the biggest impacts these Fintech companies can have is to succeed in what they are doing and force banks to make banking more efficient by putting pressure on their business models.”